The risk of losing your money when trading the financial market is always there. The moment you enter a trade, there is always a 50/50 chance of it going either way. You can exit a trade before it expires on the IQ Option platform. However, this will mean losing a fraction of your money.
Besides trading when the market conditions are favorable, capital management is a necessity if you are to ensure that your account balance is intact. This guide will teach you some of the capital management techniques used by successful traders on IQ Option.
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Table of Contents
1. Investing the Same Amount on Each Trade
Losing trades can put a reduction in your account balance. You want to regain your money. Therefore you decide to increase the amount to invest in the next trade. With the hope that it will be a winner and so recover your lost money.
Unluckily, if this trade loses, your account balance will be worsened.
Investing the same amount on each trade is one of the common capital management techniques successful traders used for trading. Take a look at the example below.
If 6 trades out of your 10 trades are profitable, you should be able to make a $8 profit and offset losses.
2. Use Profits to Trade
With this technique, you will only use the profits earned to trade. This implies that if your first trade is a winner, the total earnings should be used for subsequent trades.
From the table above, you will notice that the second trade was a lost. However, the potential earning was $32.40. That would be the amount to trade in the next session. The loss was $10, in total. However, considering that the third trade was a winner, the total profit was $15.92.
This technique uses the power of compounding to ensure winning trades offset losses incurred in the previous trades. It’s best for experienced traders who only trade two to three times a day.
However, this is a high risk technique. It involves investing an amount you would have made (but did not) in a trade. If you’re a newbie trader, it’s advisable not to use this capital management strategy especially when you don’t have a huge account balance.
In addition, it’s advisable to stop trading if you make two or three losing trades when using this strategy. Making additional trades can badly hurt your accounts.
3. Martingale Technique
This is probably one of the money management techniques with the most risk. It involves increasing the amount you invest on a trade till you finally get a winning trade. Once you have a winning trade, you should start the cycle all over again with a small amount.
The downfalls associated with this technique are more than the advantages. For example, you may end up losing all your money if you suffer several succeeding losing trades, unless you’ve got loss of capital. Another downfall is that the amount invested cannot be used to justify the profit earned in winning trades. Remember that winning trades have to offset losses incurred in the previous trades.
Below is a working example of the Martingale strategy.
The Martingale technique can work in some instances. For example, if you are trading using resistance levels and support. The moment prices hit the support level, it’s most likely that they’ll bounce back towards the range. This implies that you can expect several consecutive candles of same color. However, if the price breaks, the trading results might go against you.
Therefore, unless you’re very sure of what you’re doing, Martingale system as your capital management strategy is not a good option. It’s best to invest small amounts on a trade and make small winnings rather than invest a huge amount and loss it all.
4. Trading with Your Gut
This is also a high risk – huge returns capital management technique. Investing in this technique is simply based on how “likely” you think a trade will look like. For instance, chances of your trade winning are quite high, if you identify a trend. So, you can decide to invest a huge amount on a single trade. However, if you’re not sure of the trade being a winner, you can choose to trade a smaller amount.
5. Trading Without Emotion
The problem with trading without emotion is that emotions will still eventually get in the way. If you invest a huge amount on a losing trade, fear might grasp you discouraging you from trading huge amounts in the future. Also, if small trades fetches you money, you can end up trading huge sums in subsequent trades due to overconfidence.
The point is, trading with your gut does not really count as a money management strategy.
Why must you have a capital management technique?
As a trader, you must expect days when you will incur losses. But what effect will your loss have on the trading account? If you use a high-risk capital management technique such as the Martingale system, there are chances that a loss can wipe out your entire account.
Your main goal as a trader is to protect your money. This implies that you should do everything you can to ensure that you don’t lose a large sum of your capital on a few trades. It’s therefore very important that your capital management technique have ways of protecting your account from much risk.
For instance, besides having a certain amount set for trading, you must also put into consideration how many consecutive losing trades you’re willing to incur before you stop for a day. In addition, your strategy should state when not to trade and when to trade.
Why Capital Management Is Important?
There are different capital management techniques you can use to trade on IQ Option. You can choose one among those described above or create one that meets your trading preference and goals. Trading with IQ Options or any other financial instrument carries some risk. However, it can result in you making good profits if done right.
Trading has to do with probability and you’re not always guaranteed profits. However, employing a good money management technique, you can always be assured that your account will continue to grow.